Birmingham Bloomfield Bancshares, Birmingham, MI (BBBI)

A Case of Pure Michigan Surviving and Thriving

I so love these one-branch banks! And it’s particularly nice to find one that I can confidently bank on in the state of Michigan where I grew up.

It looks to me like BBBI will be a $15 stock, more than double today’s market price. If management continues to grow profits at the current rate in this environment where bank stocks in general are recovering, Bank of Birmingham could easily grow book value to $10 per share and trade at 150% of book in the next few years. If an acquirer enters the picture and pays the trending 10% deposit premium, investors can expect a similar return.

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Disclosure: As of this posting, I own shares of BBBI and may subsequently either dispose of them or purchase more.

Prospective Buyers	With the third highest share of deposits in town, Bank of Birmingham is no doubt attractive to acquirers, although clearly it's thriving well enough under current management to remain a pure, standalone, one-branch bank. Chemical Financial, Midland, MI (CHFC) - has an obvious hole to fill in southeastern Michigan Old National Bancorp, Evansville, IN (ONB) - has been bulking up in MI and BBBI would expand the reach of ONB's pending United Bancorp acquisition in Ann Arbor Talmer Bancorp, Troy, MI (TLMR) - has just one branch nearby with a mere 30% of the deposits held in the one-branch Bank of Birmingham
Financial Snapshot (as of 03/31/2014)	Total assets: $194M Tangible book value per share: $7.60 NPAs to assets: 0.1% Price to book: 84% Market cap: $11.8M Dividend yield: 0.0% Trailing 12-month return on assets: 0.74% Trailing 12-month return on equity: 7.5% TARP: $3.4M* *Redeemed 7/29/2011
The Crew	Thomas Wagner, Chairman Robert E. Farr, President and CEO Thomas Dorr, CFO
The Skinny	In my experience, a bank like this in a place like this is more than likely to trade at a premium sooner or later. There just aren't that many community banks left in the United States, like this: Trading at a double discount. BBBI stock suffers not only from something akin to what AAII calls the Shadow Stock Discount, but from what bank analysts are calling the Michigan Discount. The stock is little known, little followed, and subject to an arguably temporary trend of undervaluing Pure Michigan performance. Performing in top tier. Bank of Birmingham's ROE is approaching 10%, a mere 0.15% away from the average for the nation's top 200 community banks. NPAs are a miniscule 0.1%, and the bank has more than doubled both loans and deposits in the last four years. There also aren't that many communities left in the United States quite like this: Unemployment just 3.9%! Birmingham, Michigan boasts an unemployment rate that is half the 7.9% national average and a fraction of the rate in Detroit. Naturally, more people hiring and more people working adds up to more people looking to bank in Birmingham. High median income of $63K. Residents of Birmingham enjoy a median income that is 21% higher than the national average. For obvious reasons, in general, banks in affluent regions like this tend to be more profitable.
Sources	Bank of Birmingham website 2013 Annual Report The Michigan Discount (Keefe, Bruyette & Woods report) SNL Financial Confidential interviews with shareholders

Mackinac Financial, Manistique, MI (MFNC)

A Case of Scalping Shareholders at the Fork in the Road

Here's one sad story I really hope doesn't repeat itself a third time, or in any other bank at a similar crossroads for that matter. 

The hit that Makinac's shareholders were forced to take in the bank's recent dilutive capital raise was entirely unnecessary and egregious. Bank management bought itself some cash to play with as they please without a strategic plan for putting it to good use, but only by materially injuring real people. Unconscionable.

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Disclosure: As of this posting, I do not own shares of MFNC but may subsequently purchase them.

Prospective Buyers	MFNC would make a nice acquisition target for any of the following banks, but by going forward with its recent dilutive capital raise, management missed the opportunity to obtain a great price for the bank.  Chemical Financial, Midland, MI (CHFC) Fifth Third Bancorp, Cincinnati, OH (FITB) Huntington Bancshares, Columbus, OH (HBAN)
Financial Snapshot (as of 06/30/2012)	Total assets: $524M Tangible book value per share: $14.43 (prior to capital raise) NPAs to assets: 1.7% Price to book: 50.6% Market cap: $40.6M Dividend yield: 0.0% Trailing 12-month return on assets: 1.19% Trailing 12-month return on equity: 10.78% TARP: $11M* *U.S. Government recently auctioned their TARP holdings in MFNC for approximately 96¢ on the dollar ($10.4M)
Scoundrels	Paul D. Tobias, Chairman and CEO Kelly W. George, President Ernie R. Krueger, CFO and Executive VP
Red Flags	THE "CRIME": MFNC under Tobias' leadership executed a rights offering that diluted shareholders and socked TBV by at least 15%. Tobias did a similarly dilutive capital raise in 2004, tasted blood, apparently liked it, and raised his salary 60% from $225K to $360K MFNC faced three perfectly reasonable options for proceeding in ways that would have achieved respectable results without bloodshed (see below) Management disregarded the rational advice and concerns of successful, business-savvy shareholders The scoundrels boast grandiose notions and vague “hopes” for acquiring a branch or bank, despite evidence that they've not done a particularly great job of running their own THE CROSSROADS: MFNC faced three more responsible and humane options than the dilutive capital raise it chose: Carry on for a few years and try to strike some deal with new owners of TARP Wait to raise money until they have an actual deal in the works and could raise it on better terms Sell the bank for something close to book value like Citizens Republic Bancorp (CRBC), which had a similar credit and TARP profile and recently sold for 125% tangible book value and 90% stated book value
Sources	mBank website * May 2012 Proxy Statement SNL Corporate Profile SNL Financial Shareholder letters to management *Note MFNC hasn't posted an Annual Report more recent than 2010